What are the various charges in Mutual Fund investments?

If you are investing in mutual fund schemes, you might be wondering about various charges being charged by AMC or mutual fund brokers. It was always been puzzle for me about this topic when I started investing in mutual funds several years back. SEBI has been interfering in various charges in mutual funds and keep suggesting or banning few of them. What are the various charges in mutual fund schemes? How you can be smart investing by avoiding these charges in mutual fund schemes?

Asset Management Company (AMC) refers to the companies that manage the mutual funds. It is an organized form of money, portfolio manager with several mutual fund schemes depending upon the different investment objectives. The asset management companies or fund houses charge some fee for the services they provide. Right from the beginning when we start an investment till the time of redemption, there are various charges that are applicable. Every investor must be aware of these charges so as to take the investment decisions wisely. The mutual fund statement will reflect all the charges and fees deducted like transaction charges, subscription amount etc.

Various charges in Mutual Fund Schemes

Let us go, through them quickly now.

1) Entry and exit load in mutual funds

Entry load means the fees charged from the investor when he invests in the mutual fund scheme. Earlier all mutual fund schemes used to charge an entry load @ 2.25%. However, from Aug-2009 onwards, SEBI has banned entry load. Recently, one of the readers of this blog indicated that when he was investing in MF in a lump sum, his MF broker indicated as entry load and took separate cheque in broker’s name. This is how investor got cheated. Be cautious about this.

Exit load is levied as a percentage amount of the funds when the investors exit the fund or redeem mutual fund points before the stipulated due date. Generally, it is a 1 year period. Means if you sell your mutual funds or redeem your mutual funds within 1 year, you would be charged for 1% of your investments. This is applicable to all mutual fund schemes except for Liquid funds. Liquid funds aim is for short term investment, hence the exit load not applicable.

2) Transaction fees for first time and existing investors

If an investor opt for a subscription or SIP for the first time, an AMC is allowed to charge the fees as transaction charge only at the condition where the SIP or transaction is above the value of Rs. 10,000. The fees charges are Rs 150 for lump sum and Rs 30 or 1.5% (whichever is lower) for SIP. For existing customers, the fund houses are allowed to charge a transaction fee of Rs. 100 for lump sum and Rs 30 or 1.5% (whichever is lower) for SIP.

3) Fund Management Fees / Total Expense Ratio (TER) / Expense Ratio

There are different expenses involved in operating a mutual fund for AMCs. The expense ratio is a standard measurement of the costs of a mutual fund for the investment company. As of now, the maximum expenditure that the AMC can charge from its investors is 2.5% for the equity schemes and 2.25% of the debt funds. The expenses may vary as per the funds. These expenses are already deducted and your NAV of mutual fund reflects net amount. Means, you are paying these fees, but you might not be aware.

4) Security transaction tax

The mutual funds have to pay the security transaction tax (SST) while buying and selling the stocks which has to ultimately borne by the investors.

5) Exchange fees

It is the fees charged to the investors if you wish to switch over from one fund to another within the same fund group. E.g. if you are switching from HDFC Mid-cap Opps fund to HDFC Balanced fund, HDFC AMC would charge fees for this transaction. Generally the fees vary from one AMC to another.

6) Account fee

An account is a fee that some funds charge separately from investors in connection with the maintenance of the accounts. These days most of the AMC’s are not charging it, however, one need to keep an eye on this.

How you can be smart investor by avoiding these charges in mutual fund schemes?

One cannot avoid certain charges by mutual fund schemes. However, you can opt the following and there could be better ways.

1) There is no correlation between the high expense ratio and good performance of the MF scheme. So, the investors must not get carried away with the high fees thinking that its management and operations would be great to fetch more returns. On the whole, expense ratios range between 0.2% to 2%. An average equity mutual fund charges around 1.5%. You may have to pay more for international or specialty funds, which require more expertise from the managers.

2) Try to reduce transaction charges as much possible.

E.g. Fundsindia does not charge transaction charges to invest in mutual funds. They would get trial fees from AMC, hence they are okay to provide this zero transaction charge facility.

ICICIDirect charges Rs 30 / 1.5% per SIP (whichever is lower) as transaction charges. However, if your MF investment portfolio is Rs 8 Lakhs and above, they would charge zero transaction charges. This I realized when I was being charged with zero charges, but my spouse was charged for Rs 30 per SIP J.

3) Avoid being charged with Exit load. Invest in mutual funds for more than 1 year. You have 2 benefits. One, there would not be exit load, the second is if you are investing in equity funds and sell after 1 year, there is zero tax to be paid.

4) When you choose a top mutual fund to invest in India, consider expense ratio as one of the parameters. E.g. X and Y mutual funds are performing better. If X mutual fund expense ratio is 2% and Y mutual fund expense ratio is 2.5%, you can consider investing in an X mutual fund rather than Y mutual fund scheme.

Conclusion: Understanding about mutual fund charges would help you to know what additional costs you are incurring while investing in mutual funds. You can avoid such costs and increase your mutual fund returns.

Be a smart investor in Mutual Funds!!!

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Suresh KP i.e. me, have written 1250+ articles on this Blog. I love doing analysis on various Best Investment Plans like mutual funds, Stocks, IPO’s, NCD Bonds, Insurance products. If you like our blog, you can share some of the good articles on your Facebook or Twitter. This would be the BIGGEST gift which you would be giving to us.